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China Buys American

February 5, 2013

In the last 20 years China has become a powerhouse among world economies, growing even during the current global downturn. As China’s wealth and power as a nation have increased, so have the wealth and power of its individuals. There is now a burgeoning class of millionaires, and a considerable number of billionaires, who are looking for investment opportunities outside of China.

Wealthy Chinese have been investing for years in Malaysia, Singapore, the U.K., Canada and Australia. More recently they have set their sights on the U.S., going from a blip on our real estate radar to a significant force in some markets. Many real estate professionals believe this is just the beginning of a huge wave.

“We’re still in the early days of overseas investment,” says George Betz, Partner and CEO of Fortune Real Estate Group in London, the first Western company to support international real estate professionals who want to break into China. “The Chinese are very keen on U.S. real estate and want to learn more about it.

Why the U.S. now?

Private property ownership is highly valued because in China, real estate is leased to the individual by the government through 50-year leases, which can be renewed, sold or passed down, but are ultimately still government property. Also, as of fall 2011, in an effort to cool the market and prevent a bubble, the Chinese government has put restrictions on buying real estate in country, accelerating overseas investment. The U.S. is especially attractive because our government protects individual property rights, and our political and economic environment is relatively stable. Other factors have come together to make U.S. property more desirable at this time:

Currency rates. The value of the yuan has appreciated steeply against the U.S. dollar, gaining four percent in the last year, and over 20 percent in the past five years.

Inflation. The wealthy are keeping less cash on hand, and investing more overseas. Inflation has also pushed up prices for Chinese real estate.

Bargain shopping. Significant depreciation in U.S. properties translates into good values for Chinese investors. They expect the U.S. market to bounce back in the medium term, yielding high ROIs.

College. More and more wealthy Chinese are sending their children to universities in the U.S. They can buy property here to house their children and flip it later.

Status. Wealthy Chinese feel they are now “players” in the world economy. Owning luxury property in New York or Los Angeles is symbolic of this status.

Due to price appreciation in other high-end markets, including Canada, the Chinese see good value in the U.S., lower risk, and greater chance of higher returns.

Many routes to investing here

Chinese money is flowing into U.S. real estate from many sources and in many ways. Individuals, Chinese companies, and even the Chinese government are plowing cash into our slumping market.

Individual investors are buying single- and multi-family residential property, using offshore holding companies to buy commercial and industrial real estate, and are investing in EB-5 Regional Centers, which offer a visa for creating jobs in the U.S. (See the April 2011 issue of Global Perspectives to learn more about EB-5 visas.)

Chinese corporations are leasing prime office space in premium urban locations, like 1 World Trade Center; buying and developing vacant industrial sites in the now-empty locations of American companies like Lucent Technologies in Naperville, Illinois; and acquiring distressed office buildings, hotels and restaurants in secondary markets like Toledo and Milwaukee.

Chinese banks are pouring money into real estate loans in major metro areas, and investing in REITs (Real Estate Investment Trusts). Owned by the government, they are being urged to diversify investments beyond foreign exchange reserves. Chinese banks have made more than $1 billion in real estate loans in New York City in the last year. The Bank of China lent $800 million to refinance a building on Park Avenue which houses JPMorgan Chase, and will be lending $250 million to an office tower at 3 Columbus Circle.

Chinese construction companies have won bids on major public works projects in New York City and will employ local union workers. China Construction America is a subsidiary of the state-controlled construction company in China that built the Water Cube for the Beijing Olympics.

How much U.S. real estate do the Chinese own?

There are so many ways in which the Chinese are investing in the U.S. market that it’s difficult to gauge the volume of inflows. In general, Chinese prefer to keep their business deals under the radar. Because they tend not to publicize them, they are harder to track.

Also complicating the situation are restrictions that the Chinese government places on the outward flow of currency through individuals. Much of the yuan that ends up in our market flows through legal foreign direct investments in world tax havens like the Cayman Islands, or through Hong Kong and Singapore companies owned by the Chinese, and so does not actually pass directly from China into the United States.

China is now the fastest growing source of foreign purchasers here. The U.S. Bureau of Economic Analysis reports that Chinese foreign direct investment in the U.S. has grown at a compound annual rate of 34 percent over the last four years.

Where the Chinese are investing

The East and West Coasts have been most attractive so far, but Chinese investment is fanning out to other parts of the country. Chinese investors are particularly drawn to:

Luxury properties in Manhattan, Los Angeles, Chicago and other major cities, often purchased for self-use during U.S. visits.

Single-family residences in areas with large, established Asian populations and university towns, like Palo Alto, Boston and New York City.

Multi-family apartment complexes in markets where there has been substantial depreciation, like Phoenix and Miami, but where a turnaround is expected in three to five years.

Commercial properties like hotels, shopping centers and office buildings where previous owners are underwater, in primary markets and also secondary markets like Toledo and Milwaukee.

Industrial sites that have significantly depreciated, in areas that offer access to an educated, stable workforce, such as Rockford, Illinois.

Prime commercial space to lease in premium business locations.

Depending on the characteristics of your market, you may be able to take advantage of the influx of Chinese capital. If so, start looking for ways to access this opportunity. Many experts believe we are at the beginning of an investment inflow that will rival that of Japan’s purchases of U.S. real estate in the late 1980s.

Did You Know…

Luxury residences in Manhattan run about $1,500 per square foot. Comparable properties in London are about $3,600/sf, and in Hong Kong $2,000/sf.Source: Knight Frank/Citi Private Bank 2010 Wealth

Major Uptick In Wealthy Chinese

According to the Hurun Research Institute, which tracks wealth and its sources in china, 960,000 individual shave a net worth of more than 10 million yuan ($1.6 million) in 2011, up almost 10 percent from 2010.

Wealth May Move Offshore

A survey from the Hurun Research Institute and the bank of china, conducted in 18 cities with 980 people, found that 46% of Chinese with assets over 10 million yuan were considering moving abroad.